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Case

Walmart’s Bargaining Power over Suppliers

When Walmart and other discount retailers began in the 1960s, they were small operations with little purchasing power. To generate store traffi c, they depended in large part on stocking nationally branded merchandise from well- known companies such as Procter & Gamble and Rubbermaid. Since the discounters did not have high sales volume, the nationally branded companies set the price. This meant that the discounters had to look for other ways to cut costs, which they typically did by emphasizing self- service in stripped- down stores located in the suburbs where land was cheaper (in the 1960s, the main competitors for discounters were full- service department stores such as Sears that were often located in downtown shopping areas).
Discounters such as Kmart purchased their merchandise through wholesalers, who in turned bought from manufacturers. The wholesaler would come into a store and write an order, and when the merchandise arrived, the wholesaler would come in and stock the shelves, saving the retailer labor costs. However, Walmart was located in Arkansas and placed its stores in small towns. Wholesalers were not particularly interested in serving a company that built its stores in such out- of- the- way places. They would do it only if Walmart paid higher prices.
Walmart’s Sam Walton refused to pay higher prices. Instead he took his fl edgling company public and used the capital raised to build a distribution center to stock merchandise. The distribution center would serve all stores within a 300- mile radius, with trucks leaving the distribution center daily to restock the stores. Because the distribution center was serving a collection of stores and thus buying in larger volumes, Walton found that he was able to cut the whole salers out of the equation and order directly from manufacturers. The cost savings generated by not having to pay profi ts to wholesalers were then passed on to consumers in the form of lower prices, which helped Walmart continue growing. This growth increased its buying power and thus its ability to demand deeper discounts from manufacturers.
Today Walmart has turned its buying process into an art form. Since 8% of all retail sales in the United States are made in a Walmart store, the company has enormous bargaining power over its suppliers. Suppliers of nationally branded products, such as Procter & Gamble, are no longer in a position to demand high prices. Instead, Walmart is now so important to Procter & Gamble that it is able to demand deep discounts from them. Moreover, Walmart has itself become a brand that is more powerful than the brands of manufacturers. People do not go to Walmart to buy branded goods; they go to Walmart for the low prices. This simple fact has enabled Walmart to bargain down the prices it pays, always passing on cost savings to consumers in the form of lower prices.
Since the early 1990s, Walmart has provided suppliers with real- time information on store sales through the use of individual Stock Keeping Units (SKUs). These have allowed suppliers to optimize their own production processes, matching output to Walmart’s demands and avoiding under- or overproduction and the need to store inventory. The efficiencies that manufacturers gain from such information are passed on to Walmart in the form of lower prices, which then passes on those cost savings to consumers.